Archive for December 26th, 2007

Elizabeth Warren, a Harvard Law Professor suggests time has come to take a look at setting a Financial Product Service Commission. Her idea is here. The snapshot of the idea is:

In the US today it is not possible to buy a toaster that has a 1-in-5 chance of bursting into flames and burning down a customer’s house. But it is possible to refinance an existing home with a mortgage that has the same 1-in-5 chance of putting the family out on the street—without ever disclosing that fact to the homeowner

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the Rword supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of being put on store shelves. Credit products, by comparison, are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features. By comparison, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.

She suggests that on the lines of US Consumer Product Safety Commission (CPSC), we must have a FPSC. Read the paper for further ideas.

The proposal couldn’t have been more timely. Financial Products are really complex and people don’t read even simple loan documents fully. And if you expect that they would read the complex terms that come with a much more complex loan ( NINJA, no doc , Negams etc), we are expecting a bit too much. The caveat emptor principle cannot work in financial products as it requires a lot of effort to understand and monitor the developments. Even the best financial brains fail repeatedly trying to understand financial markets.